Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations.If inflation is actually 6 percent over the next year, which of the following will occur?

Question

Quizplus · Accepted Answer

If inflation turns out to be 6 percent instead of the expected 5 percent, the wages of university employees will only increase by 5 percent, which will lead to a decrease in their real wages. Real wages are nominal wages adjusted for inflation, so if inflation is higher than expected, the purchasing power of employees' wages will be lower than anticipated. Therefore, real wages for university employees will fall. None of the other answer choices are necessarily true based on the given information.

Employees at the University Have Negotiated a 5 Percent Increase